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US Fed

Precious metals banked another solid week of gains as investors looked for alternatives to the stock market and U.S. dollar. Both gold and silver pushed through important technical resistance levels. Metals bulls hope to see markets enter a virtuous cycle; improving charts followed by more speculative long interest leading to improved charts.

There is some evidence this may be happening.

TFMetalsReport.com reports the inventory of the largest exchange-traded gold fund (GLD) bottomed in December. It has since rallied sharply as 1) speculators are buying shares in the ETF in volume and 2) GLD “authorized participants” — mostly bullion banks — are covering short positions.

The U.S. equity markets will command most of the focus this week as trading continues to be volatile. The S&P 500 has fallen back to just above key support level in the 1,850 range. If support fails, we’ll have an interesting week.

One wonders if the U.S. can be far behind should economic data continue to disappoint. Former Fed chairman, Ben Bernanke, expects our central bank to add negative rates to the tool kit for fighting recession. And Bloomberg reported that the odds of negative rates, while still relatively small, are rising.

Reasons to Be Cautiously Optimistic on PRECIOUS Metals

Precious metals markets are picking up steam. Last week’s price performance was the best we have seen in months and both gold and silver broke through some important overhead resistance levels. The weekly gains stacked on top of the very strong showing in January. So where do we go from here?

Metals prices are riding higher primarily based on two drivers; fear and the Federal Reserve. Let’s take a look at both for clues about what to expect in the coming months…

It looks increasingly like the world economy is headed for trouble. Fear may be on the rise. Investors are grappling with some pretty lousy economic data, and last week was no exception. The ISM Manufacturing Report showed the fourth straight down month for factories, and the biggest drop in manufacturing activity in more than a year.

Even more problematic, Chinese manufacturing hit a 3-year low point, and the outlook there is grim. The Baltic Dry Index — which tracks costs of ocean freight for commodities such as grains, base metals, and coal — dropped to its lowest level ever last week. Demand for raw goods globally continues to sink.

Main Street America was hit with announcements totaling more than 75,000 planned layoffs in January — 42% more than the same month last year. The retail sector is particularly hard hit. Wal-Mart announced it will close 269 stores globally and 16,000 people will lose their jobs. Macy’s expects to cut nearly 5,000 from its payroll.

But retail certainly isn’t the only sector struggling. Job losses in the oil and gas sector are huge, and Caterpillar recently announced plans to close 4 plants in the U.S. and China.

American consumers are responding to the recent bad news. The key Personal Incomes and Outlays report published a week ago revealed they are battening down the hatches — spending less and saving more.

Wall Street is also feeling the pain. The market for high yield “junk” bonds is deteriorating. Lenders, desperate for better yield in a world dominated by artificially low interest rates, aggressively loaned money into volatile sectors such as oil and gas. Much like the collapse of subprime home lending in 2008, it looks as if those bets may go bad.

In fact, markets are dealing with increasing fears of default everywhere. Risk is jumping significantly for some of the world’s largest banks. The cost to insure the debts of many of these behemoths via credit default swaps spiked massively in recent days.

Virtually all of these institutions are larger than Lehman Brothers. Should even one of them collapse, it will likely be much more difficult to contain the chain reaction that follows.

Fear looks likely to persist and may even accelerate in the coming months. Thus far in 2016, precious metals have been big beneficiaries as investors look for safe havens. That’s an encouraging sign given gold and silver futures missed getting much safe-haven buying the last time the economy slid toward recession in 2008 — at least initially.

With regards to Fed policy, officials there want you to know their decisions are “data dependent.” Lately the S&P 500 seems to be the data they care most about. Just a few weeks ago the consensus was for four additional rate hikes in 2016. Since then the S&P 500 has dumped nearly 10% and the official Fed-speak, as well as the consensus for further hikes, completely reversed.

The next FOMC meeting is in March. Odds are we will see officials become even more dovish between now and then. If that occurs we can expect even more weakness in the U.S. dollar and strength in precious metals.

It is important to note that if we get a major shock in the markets — akin to the collapse of Lehman Brothers in 2008 — then all bets are off with regards to metal prices. As happened then, traders may initially be forced to sell precious metals futures along with just about everything else to raise cash and cover margin calls.

This time around, however, metals are at a cyclical low with all speculative money having already been completely flushed out. So far, so good.

* Clint Siegner is a Director atMoney Metals Exchange, the national precious metals company named 2015 “Dealer of the Year” in the United States by an independent global ratings group. A graduate of Linfield College in Oregon, Siegner puts his experience in business management along with his passion for personal liberty, limited government, and honest money into the development of Money Metals’ brand and reach. This includes writing extensively on the bullion markets and their intersection with policy and world affairs.

While a month is a pretty short time in terms of global finance, the fallout from the U.S. Fed’s December rate rise has seen, as expected, a stronger U.S. dollar. But what virtually all the major bank analysts had forecast – a consequent decline in the gold price in U.S. dollar terms – just has not come about. In the event the reverse has been true and gold has been rising along with the dollar, contrary to generally accepted gold price theory. This is pointed out beautifully in the latest chart from Nick Laird’s www.sharelynx.com charting site and is shown below.

As can be seen from the chart, ever since around the time of the Fed increase of 25 basis points, small though that was, the dollar index has been on an overall upwards trend. Before the Fed increase gold and the dollar had been exhibiting their normal relationship – dollar up and gold down. But since the rate rise – almost to the day – gold has also been rising overall. Indeed it has even been rising far faster than the dollar. Can this continue?

What the forecasters had not been taking into account has been the post Fed rate increase dive in general equities virtually across the board, as markets took the rate rise, together with Fed projections of three or four more similar increases this year, as a sign of continuing money tightening. Indeed the stock market declines – perhaps further stimulated by something of a rout in Chinese equity markets, which are even more of a casino than their Western counterparts – look as though they could be in danger of turning into a true rout……..

The New York gold price closed Monday at $1,109.30 up from $1,093.50 In Asia it was moved down to $1,100 but in London it slipped back slightly where the LBMA price was set at $1,097.45 up from $1,096.00with the dollar index a tad higher at 98.82 up from 98.72 yesterday. The euro was at $1.0882 up from $1.0863 against the dollar. The gold price in the euro was set at €1,010.12 up from €1,010.23 as the euro steadied. Ahead of New York’s opening, the gold price was trading at $1,099.00 and in the euro at €1,011.65.

Silver Today –The silver price in New York closed at $14.30 up 28 cents. Ahead of New York’s opening the silver price stood at $14.06.

Price Drivers

The breach of $1,100 has made some investors swallow hard after a strong rise brushed away resistance easily once gold broke above $1,085. The gold price is settling back to support at $1,100. Yesterday saw purchases of 4.166 tonnes into the SPDR gold ETF and a relatively massive purchase of 3.87 tonnes into the Gold Trust. The holdings of the SPDR gold ETF are now at 645.131 tonnes and at 156.42 tonnes in the Gold Trust. These two purchases confirm a change in attitude towards gold by U.S. investors.

When global markets are so volatile all investors have to increase the ‘charlie suger’ [common sense] and lower emotions in their investment decisions. For instance, the P.E. ratio on Chinese equities is around 60 whereas on developed world markets it is at 18 on average. The Chinese stock market is peopled by retail investors who rely on ‘good luck’ to dictate the way forward in markets. It is independent of the Chinese economy despite official efforts to make it a conservative reflection of the economy. For the fall in global equities to be attributed to Chinese markets, stretches credibility too far. Developed world equities have been readying for a fall for a long time. While China may have been a ‘trigger’ to their fall, they fell because there is little reason to, on average, to take them higher. Investors are now selling and looking for alternatives. The falls seen to date are only the beginning, we feel. We do see markets in crisis in 2016 with increasing volatility and diminishing liquidity. The potential for rate rises in 2016 to threaten gold, have evaporated as only two small hikes appear to be on the cards for 2016.

The fall in the Yuan is just over 3% of late. Why the fuss over its fall? It is primarily because the U.S. & China’s different interests point to a future currency war should their interests diverge too far. The Chinese purchase of 19 tonnes of gold last month indicates once more, just how committed to gold China is just as U.S. holdings of over 8,000 tonnes shows just how important gold is to the U.S., particularly in view of the potential currency conflict in the future.

One of the hardest things for a mining executive to do may be nothing. But in a market that is not rewarding companies for pulling resources out of the ground, Sprott US Holdings Inc. CEO Rick Rule would prefer to see what he calls “optionality” rather than dilution from companies looking to justify salaries. In this interview with The Gold Report, he praises innovative precious metals streams on base metal projects.

The Gold Report: In November, you called the bottom for precious metals. Do you still believe that we’re in the bottom?

Rick Rule: Yes, as long as you can define a bottom gently. I said in that same interview that the most important factor in gold pricing was the fact that it was priced in U.S. dollars, and we see a topping in the U.S. dollar. In fairness, Karen, if you had asked me that same question two years ago, I would have responded in the affirmative and been quite wrong. But I do think the upside in gold is both larger and closer than the downside in gold.

TGR: Now that the Federal Reserve has increased the key interest rate slightly, the expectation is that the value of the dollar will increase relative to other currencies. How could that be the sign of a bottom for gold?

RR: I cut my teeth in the gold business in the 1970s when the prime interest rate in the U.S. increased from 4% to 15%, and the gold price went from $35/ounce ($35/oz) to $850/oz. I also remember that the gold price increased in 2002 in a climate of increasing U.S. interest rates.

The question is more about the reason that interest rates get raised than it is about the simple fact that interest rates go up. If interest rates go up because there is an anticipation of the deterioration in the price of the dollar and, as a consequence, savers deserve more compensation for lending credit, that sort of ethos is supportive to the gold price. If, by contrast, Janet Yellen can make not just the first 25 basis point interest rate rise succeed but subsequent interest rates rise, too, in other words if she can get a positive real interest rate on the U.S. 10-year treasury that exceeds the depreciation in the purchasing power of the currency, then I think we’ll see renewed dollar strength. I don’t believe she’s going to be able to do that, but the market will determine that.

TGR: Back in the 1970s, the international currency situation was different. Today, the euro and the yuan are part of a currency basket competing with the dollar. If gold is priced in U.S. dollars but now we have competitive currencies, is the logic used in the 1970s relevant anymore?

RR: Although we are in a multicurrency world, the dollar hegemony relative to other currencies has stayed intact. If you owned gold in almost any currency in the world in the last 18 months, gold performed its role as a store of value relative to the depreciation in currencies. It was only the strength of the U.S. dollar relative to all other media of exchange, including gold, that caused gold to perform poorly in U.S. dollar terms. To the extent that the U.S. dollar hegemony in world trade begins to be compromised in favor of other currencies, that weakening would be beneficial to the gold price.

You see, any time the denominator declines, the numerator becomes less important. That means if the dollar buys less of everything, it buys less gold, ergo, the gold price goes up at least nominally. Probably more importantly, however, the response that we’ve seen in the last 10 years to financial uncertainty has been an attraction for international investors into U.S. Treasuries as a store of value. If the purchasing power obtained from the real interest rate on U.S. Treasuries comes to be seen globally as negative, the attractiveness of U.S. Treasuries generally, relative to gold, will decline.

What traditionally has happened in periods of uncertainty is that investors have chosen to store some portion of their wealth in gold. The U.S. Treasuries have replaced gold to some degree over the last 10 or 15 years. My suspicion is that gold will regain some of the market share it has lost to the U.S. Treasuries as a consequence of a reduction in confidence in the U.S. dollar and U.S. Treasuries. At current interest rates, with the ongoing deterioration in the purchasing power of the dollar, U.S. Treasuries are a very flawed instrument despite their popularity.

TGR: Why are they popular?

RR: I think they are popular because people have an intrinsic sense that losing 1 or 2% a year in purchasing power beats losing 30% a year in the equities markets. People are genuinely afraid of the direction in the economy. They’re afraid of a replay of 2008.

Super investor George Soros once said that you make large amounts of money by finding a popularly held public precept that’s wrong and betting against it. I just last night watched the movie The Big Short, and I was reminded that it’s not uncommon to have the financial services industry, the government and the populace believe something to be true that is categorically false. I’m not suggesting that the U.S. 10-year Treasuries are as stupidly overpriced as the U.S. housing market and mortgage-related securities were in the last part of the last decade, but I do suspect that we are in a bond bubble, in particular a sovereign bond bubble. I suspect that a 30-year bull market in bonds is fairly close to being over. Raising rates is very difficult for the principal value of bonds. I think we’re closer to the end of the bond bull market than we are to the beginning and that’s very good for gold.

TGR: In terms of resources, are there some widely held popular beliefs that you believe are not true?

RR: I do. Sadly, as an American, I think the hegemony of the U.S. economy relative to the rest of the world economy is a widely held precept that’s untrue. Remember in 2011, the pro-gold narrative revolved around on-balance sheet liabilities of the U.S. government—just the federal government, not the state and local governments—of $16 trillion ($16T). That was considered unserviceable in an economy that generated new private savings of $500 billion a year. If $16T was unserviceable in 2011, how can $19T be serviceable today? Was $55T in off-balance sheet liabilities—Medicare, Medicaid and Social Security—in 2011 less serviceable than $90T in off-balance sheet liabilities today?

My suspicion is that the change in the interpretation of the narrative has to do with the fact that in 2011, the lessons of 2008–2009 were much closer. My observation, having been in financial services for 40 years, is that people’s anticipation of the future is set by their experience in the immediate past. And the experience that we’ve had in the 2011–2015 time frame is that the big thinkers of the world—the Yellens, the Merkels, the Obamas—have somehow muddled through. But the liquidity they have added to the equation is not a substitute for solvency. That is the great, popularly held precept that’s wrong. What I don’t know is when the reckoning occurs.

TGR: Going back to Soros and a widely held popular belief and you bet against it, what’s the bet against this?

RR: Gold for one thing. I think you also need to have U.S. dollars because cash gives you the courage and the means to take advantage of circumstances like 2008. But I think that if you had a set of circumstances where faith in the U.S. dollar and U.S. dollar-denominated sovereign instruments began to falter, gold would be an enormous beneficiary. History tells us that if you’re using gold as an insurance policy that a very small premium—a fairly small amount of gold held in a portfolio—gives you an enormous amount of insurance. In other words, the upside volatility in the gold price is such that you can protect your portfolio against losses in other parts of your portfolio by having fairly moderate gold holdings.

TGR: Are you talking about physical gold?

RR: This would apply to physical gold or proxies like the Sprott Physical Gold Trust, the Sprott Physical Silver Trust and the Sprott Physical Platinum and Palladium Trust.

TGR: Soros has said that sometimes it takes two or three years before a bet actually comes in to the money. If we are expecting the gold price to increase as the faith in the dollar falters, what is the role of mining equities in betting against the status quo?

RR: I think it’s important to segregate between the gold bet and the gold equities bet. I would say if you think that gold is going to go up, buy gold. Don’t buy the gold stocks for that reason. This is particularly the case with the juniors. People ask me, “Rick, if the price of gold goes up, what will it do to the share price of my Canadian junior, Amalgamated Moose Pasture Mines?” The truth is that Amalgamated Moose Pasture doesn’t have any gold. It’s looking for gold.

If the price of something that you don’t have goes up, it doesn’t have much impact on the intrinsic value. I will say that the leverage that’s inherent in the best 10% of gold stocks is superb, but you need to buy those stocks because the management team is adding relative value. You can’t buy the shares hoping for a magnification of the gold price increase. That won’t compensate for the risks. There have to be other ways the company is advancing.

The truth is that the gold mining industry has been an enormously efficient destroyer of capital in the last 40 years despite real increases in the gold price. You need to be an excellent stock picker to overcome drag brought on by corporate inefficiency relative to the inherent leverage that you should theoretically enjoy in equities relative to the gold price. The equities have made me an enormous amount of money in the last 40 years. It’s just that as a consequence of understanding the equities for what they are, I’ve done a better job of picking them.

TGR: The Silver Summit was the first time I heard you explain the concept of “optionality.” What is your advice in this climate for mining investors?

RR: For the right class of reader who is speculative and willing to do the work, there is a class of junior company that offers extraordinary leverage to the changing perceptions in favor of gold and gold equities. It is inherently illogical to put a mine in production because you think the price of a commodity is going to go up in the future. Let’s say that there’s a five-year lag between the time that you put the mine in production and the time that the commodity price goes up. What happens is that you’ve mined the better half of your ore body and sold that gold during periods of low gold prices in anticipation of higher gold prices. So the gold price goes up, and you have a hole in the ground where your gold used to be. Fairly silly.

A much better strategy is to buy deposits cheaply when gold prices are low. Then hold them in the ground, spending almost no money on beneficiation. Spending money at that point only causes you to issue equity, which reduces your percentage ownership in the deposit.

TGR: How does someone who is not a geologist know what the relative cost of getting that gold is if the company hasn’t done some work like drilling and publishing a preliminary economic assessment to educate me?

RR: One thing investors can do is subscribe to publications like Brent Cook‘s newsletter or visit the free educational material at www.sprottglobal.com. The truth is that nobody, even the best investor in the world, is going to get it right all the time. All you have to do is get closer than your competition. Given the fact that most of your competition isn’t doing any work whatsoever, the bar isn’t very high.

TGR: Another investment strategy that you have been a fan of is streaming companies. How would you compare their optionality given where the gold price is now?

RR: I love the streaming business. It’s regarded as an extremely conservative strategy, and maybe that’s why I like it. In the streaming business, the contracting company buys the rights to a certain amount of gold or silver from a mine for a fixed price over a given period of time. The company receives the gold in return for a pre-negotiated payment irrespective of the gold price at the time that the gold is received. The company that contracts for the gold isn’t responsible for the capital cost required to build the mine, so any cost overrun associated with the mine is irrelevant to the streamer. Similarly, it is not responsible for the operating cost of the mine. It has already locked in its costs. Commonly, those are about $400/oz. The margin between $400/oz and $1,000/oz—$700/oz—is substantially greater than the margins enjoyed by the mining industry in general, which are, in fact, negative.

What I really like about the streamers right now is the arbitrage in cash flow valuation between the streaming companies and the base metals mining companies. Precious metals-derived revenues in a streaming company, because of the success of streamers in the last 20 years, have been capitalized at about 15 times cash flow. That same precious metals revenue as a byproduct revenue in a base metals mine is capitalized at about six times cash flow. That means that a streaming company could buy that cash flow from a base metals mining company at $10M, and it would be wildly accretive to the streaming company at the same time as it would materially decrease the cost of capital for the base metals mining companies.

Base metals mining companies are in truly dire circumstance right now, with the price that they’re being paid for their base metals commodities being substantially lower than their all-in sustaining capital costs for producing it. This means that the base metals mining companies need to do whatever they can do to lower their cost of capital. My suspicion is that you will see many billions of dollars of precious metals byproduct streams from base metals mines being sold from the major base metals mining companies around the world to the streaming companies. My suspicion is that these transactions will simultaneously save the base metals mining company billions of dollars in capital while being accretive to the precious metals streamers by billions, too. I think this is a transformative event for the streamers.

TGR: If a base metals company is essentially losing money for every pound pulled out of the ground, why wouldn’t the management leave the commodity in the ground until prices increase? Why don’t they practice optionality?

RR: One of the challenges with the optionality strategy is it is very tough to get a management team to do nothing. It’s tougher yet to get them to be paid appropriately for doing nothing. Not mining is an awful lot cheaper and an awful lot easier than mining, but the truth is that there’s a bias to produce, and there may be a need to produce. Your all-in cost to produce 1 pound of copper may be $2.75, but your cash cost to produce that pound may be $1.70, and if you sell it for $2/lb, you are generating $0.25 to service debt and cover the all-important CEO salary.

TGR:Frank Holmes agreed with you when he said that while the price of gold seems to have languished in the U.S. dollar terms, in other currencies it has been doing quite well. Particularly, he pointed to Australian mining companies as standing out. Do you agree?

RR: Australian gold stocks have performed incredibly well this year, so part of that thesis has been used up by the share price escalation of those companies. Given that Australian gold mining companies sell their product in U.S. dollars but pay their costs in Australian dollars, they had a de facto 40% decrease in their operating costs, which is extraordinary. In fact, the decrease was deeper than that because a major component of their variable costs is the price of energy, and the price of energy fell 50% in U.S. dollar terms at the same time that the Australian dollar fell further. That means that the operating performance of gold mining companies in Australia relative to gold mining companies whose costs are denominated in U.S. dollars with U.S. operations has been extraordinarily good.

We don’t see any near- or immediate-term strength in the Australian dollar so this cost competitiveness could continue. Additionally, the iron and the coal industry, which compete for workers and inputs directly with the gold industry, have experienced continued distress, which means that the cost push even in Australian dollar terms will diminish.

Plus, we see the Australian market as more honest than the Canadian or the London market in the sense that the mining industry in North America and Europe became increasingly securities-oriented where the value proposition became rocks to stocks and stocks to money. In Australia, the ethos is more a direct drive, more a sense that you want to make money mining and that the stock ought to take care of itself. We see that as a competitive advantage that will continue for five or six years while the North American and European industries reform their expectations.

TGR: The value of the Canadian stocks has been decimated over the last three years. If the management teams are not focusing now on making money now, what’s going to make them change?

RR: Hopefully, bankruptcy. There are 500 or 600 listings on the TSX Venture Exchange that are zombie companies with negative working capital. They’re in a capital-intensive business, but they have no capital, so they aren’t really in businesses. These companies need to be extinct. It’s an ugly thing to say to the people who own stock in these cockroaches and uglier still to the people who work for the cockroaches, but it has to happen.

RR: This conference is in Vancouver, so it’s easy and cheap for companies to exhibit there. The first thing that I hope that people do is understand that if the narrative that existed with regard to resources and precious metals in 2011 was true then, it’s more true now. Only the price has changed. Investors need to recognize that a market that’s fallen by 88% in nominal terms and 90% in real terms is precisely 90% more attractive now than it was then. The mistakes that people made then were mistakes of overvaluation. The mistakes that people make now are mistakes of undervaluation.

It’s important, however, not to make the mistakes that we made in the past. The truth is that you need to temper your expectation of wonderful stories with hard core reality, with securities analysis, which people are unwilling to do. At that conference, you will have the ability to learn lessons in equity market valuations if you are willing to work and absorb them. And you have the ability, with 200 exhibitors present, to practice the lessons that you’ve learned in real time, 20 or 30 meters away from where you learned the lesson itself. So it’s a wonderful opportunity for people who come to work rather than people who come to be entertained.

TGR: Thank you, Rick, for your insights.

Rick Rule, CEO of Sprott US Holdings Inc., began his career in the securities business in 1974. He is a leading American retail broker specializing in mining, energy, water utilities, forest products and agriculture. His company has built a national reputation on taking advantage of global opportunities in the oil and gas, mining, alternative energy, agriculture, forestry and water industries. Rule writes a free, thrice-weekly e-letter, Sprott’s Thoughts.

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DISCLOSURE:1) Karen Roche conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report and The Life Sciences Report, and provides services to Streetwise Reports as an employee. She owns, or her family owns, shares of the following companies mentioned in this interview: None. 2) The following companies mentioned in the interview are sponsors of Streetwise Reports: Fission Uranium. The companies mentioned in this interview were not involved in any aspect of the interview preparation or post-interview editing so the expert could speak independently about the sector. Streetwise Reports does not accept stock in exchange for its services.3) Rick Rule: I own, or my family owns, shares of the following companies mentioned in this interview: Fission Uranium Corp. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I determined and had final say over which companies would be included in the interview based on my research, understanding of the sector and interview theme. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview. 4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts’ statements without their consent. 5) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports’ terms of use and full legal disclaimer.6) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their families are prohibited from making purchases and/or sales of those securities in the open market or otherwise during the up-to-four-week interval from the time of the interview until after it publishes.

The New York gold price closed at $1,078.20 up from $1,071.70 on Friday’s close. In Asia prices dropped to $1,074 before London took it down to $1,067 as the dollar index held close to Friday’s level of 97.90 at today’s 97.85 on the dollar Index. The euro is at $1.0955 almost the same as Friday’s $1.0956 against the dollar. The London a.m. LBMA gold price was set at $1,068.00 up from Friday’s $1,067.20 Friday. In the euro the fixing was €974.05 up from yesterday’s $972.79. Ahead of New York’s opening, the gold price was trading at $1,068.65 and in the euro at €974.33.

The silver price in New York closed at $13.95 down 16 cents. Ahead of New York’s opening the silver price stood at $13.80.

Price Drivers

Dealers and speculators are trying to second guess what the market’s reaction to the expected Fed rate hike on Wednesday will be and are reading the price in line with the Technical picture, as downwards. But such plays are high risk ones, for if the Fed does not affect the dollar exchange rate they will have to unwind their positions in the face of a market going the other way.

As you likely know, all financial markets across the globe are waiting with bated breath for the Fed announcement. When markets presume to know what is about to happen they discount that presumption. So the markets then go another way after that. If it is even slightly different to what is expected markets react strongly. So while we expect a quiet week until the announcement, thereafter expect volatility. One new provider [Bloomberg] even has a countdown clock for Janet Yellen’s speech. While she is a demure academic, it is more than likely that she will surprise us. –

Once again, we saw no sales from the SPDR gold ETF and nothing from the Gold Trust, on Friday. The holdings of the two gold ETFs, the SPDR gold ETF and the Gold Trust remain at 634.63 tonnes in the SPDR gold ETF and at 156.32 tonnes down from 157.07 tonnes in the Gold Trust. These sales would have had no impact on the gold price and most probably were from investors reducing their exposure to higher risk on Wednesday.

When the Bank for International Settlements warned of the “uneasy calm” in global financial markets it touched a host of global problems that would be affected by an interest rate move in the U.S. What they meant too was that many of these problems are in themselves structural problems that have not been fixed by those concerned or cannot be fixed by them. So the ‘ripple effect’ will not just be a short term reaction to Wednesday’s announcement, even if calm returns after the initial reaction. We see these ripples moving through into 2016 and likely changing the scene of world financial markets for more than next year. This will be positive for gold and silver.

China’s Shanghai Gold Exchange withdrawals continue strong with another 49 tonnes taken out in the week ended November 27th bringing the year to date total to just over 2,362 tonnes. For comparison the previous full year record total achieved in 2013 has already been exceeded by around 180 tonnes, with just over a month to go until this year end. We are downgrading our full year forecast to 2,580 tonnes from the previous 2,600 tonnes plus, but this would still be 18% higher than the previous record – and around 23% higher than last year’s total withdrawal figure.

Much is made in the West of the downturn in the Chinese economy – but this is a reduction in percentage growth – not a recession. Sometimes the two seem to be confused by the media. The Chinese middle classes are continuing to grow and employment is being pushed in the government’s economic reboot to the services and domestic consumption sectors which tend to pay higher wages than manufacturing and thus the disposable wealth within this ever growing population segment is growing rather than diminishing.

As one of the speakers at this week’s Mines & Money conference in London pointed out, for thousands of years China and India were the world’s richest countries – a position they mostly lost in the 19th and 20th centuries. They are becoming so again – a return to the status quo ante perhaps – and with their huge inherent disposition to accumulate gold (which has served their people well over the centuries as a store of wealth and protector against economic downturns and inflation) we can only see the gold acquisition trend continuing to build.

We are already close to the crunch situation in the supply/demand equation for gold and again, as a number of highly respected speakers suggested at Mines & Money, the gold price will go up, and likely go up very sharply, although none would really commit themselves on a timescale for this to occur. Perhaps the nearest was Pierre Lassonde who reckoned the U.S. Fed has talked itself into virtually having to start raising rates this month, or lose all credibility, but that it will be forced to backtrack before the middle of next year, cutting rates again – or even implementing QE4 – and this would be the trigger for the start of a gold perception resurgence. Grant Williams (no relation) talking at the same event somewhat concurred and commented that when gold does rise it will likely move rapidly and comfortably take out the previous all-time price high. Good fodder for the remaining gold bulls!

Gold has moved back above $1180 this morning on the feeling that today’s FOMC meeting will again turn into a can-kicking session as far as potential interest rate rises are concerned. But beware – the Fed may have painted itself into a corner with a…

Over the past few trading days something positive has been seen in the gold investment sector. The gold price has seen signs of just a little strength – even in the absence of Chinese physical demand with the markets closed there for the 7-day Autumn Golden Week holiday. While Chinese gold trade will not quite have been zero (there is ongoing retail demand over the period), there will have been no Shanghai Gold Exchange deliveries and imports will also have been negligible and gold price premiums have been falling as a result.

But despite this reduction in physical gold movement into the country, the gold price has been strong (relatively in relation to recent months) driven mostly be at least signs of a minor change in sentiment towards the yellow metal in the West. This is making short speculators nervous and retail demand in the West has been seeing signs of a change – in part triggered over the past few days by the very disappointing non-farm US payroll figures coming in well below expectations and suggesting to the markets that any Fed interest raising programme may have been yet further delayed……

New York closed Tuesday with the gold price at $1,105.50 down $3.20. Gold then rose in Asia to $1,107.7. In the euro this was €980.05 up €0.39. This morning the dollar index started the day at 95.59 slightly higher than the 95.22 of yesterday. The LBMA gold price was set at $1,109.75 up $4.25 from yesterday. The euro equivalent was €988.60 up by €11.60. Ahead of New York’s opening gold was trading at $1,108.90 and in the euro at €988.10.

The silver price closed at $14.43 down 1 cent on yesterday in New York. Ahead of New York’s opening silver was trading at $14.56.

Price Drivers

The entire financial world remains on hold for the Fed’s statement on Thursday with speculation ramping up in the media. Why the hype? It is not just a rate hike in itself. The levels of debt throughout the world have never been this high, they dwarf anything we have seen in history. For instance some believe that the U.S. car market loans are in a bubble, with loans being dished out to even those that cannot afford them. Individual and corporate debt, let alone central bank debt will be immediately impacted even with a small rate hike. Even a small rate hike will change the world’s attitude to debt and cause a detrimental impact on all financial markets.

Gold and silver prices remain barely moving, waiting for the starter’s gun. The question is, “Which way will they run?” Likewise, there were no dealings in the SPDR gold ETF or the Gold Trust. This again leaves the holdings of the SPDR gold ETF at 678.183 tonnes and 159.90 tonnes in the Gold Trust.

The media remains riveted to slowing growth in China. We are prompted to point out that the government there has informed all that growth will slow as attention turns from building infrastructure to building up the consuming middle classes. With retail sales figures in July growing over 11% [Is there any other nation reaching such levels?] the middle classes are growing, confirming success in this change of direction. For gold and silver investors these are the important numbers as these are the people fuelling the enormous gold demand we are seeing in the numbers coming out of the Shanghai Gold Exchange. Julian D.W. Phillips for the Gold & Silver Forecasters – www.goldforecaster.com and www.silverforecaster.com

New York closed with the gold price at $1,108.70, up $0.30. This morning gold was trading at $1,108.00 in Asia again. In the euro this was 979.66 up €3.06. This morning the dollar index started the day at 95.22 almost unchanged from 95.09 on yesterday. The LBMA gold price was set at $1,105.50 down $2.50 from yesterday.The euro equivalent was €977.54 down by €1.26.Ahead of New York’s opening gold was trading at $1,105.90 and in the euro at €977.06.

The silver price closed at $14.44 down 6 cents on yesterday in New York. Ahead of New York’s opening silver was trading at $14.33.

Price Drivers

The entire financial world is braced for the Fed’s statement on Thursday with speculation as high as we have ever seen. Market commentators are doing their best to convince themselves that a rate rise is coming from this week’s meeting even if it is only 0.1%. That’s why the gold and silver price’s trading range has become very tight. Consequently there were no sales or purchases into or from the SPDR gold ETF or the Gold Trust, yesterday. This leaves the holdings of the SPDR gold ETF at 678.183 tonnes and 159.90 tonnes in the Gold Trust.

The Fed is charged with placing U.S. interests before those of the rest of the world, so the question is, “Will any global ripple effects affect the U.S. economy or will a stronger dollar hurt it?” This, we believe will drive their decision as to when they raise rates.

On the other side of the world, another step forward has been taken to internationalize the Yuan. Global central banks will now be allowed to deal in the Yuan. With no current Yuan holdings, this means they will be able to buy them. We expect they will buy to the extent of their trade with China and not use the dollar to buy direct from China. What will the U.S. reaction be? At the moment around 63% of central bank reserves are in the dollar with around 20% in the euro and the balance in other currencies, mainly the Yen and the Pound Sterling. Any Yuan purchases would reduce these totals. The advantage to central banks is being able to cut out the costs of using the dollar to buy Chinese goods. We also believe this precedes giving trading partners of China the opportunity of cutting out dollar costs and exchange risks by going straight to the Yuan. It is an important step and one which may well see other developments on this front.

There were purchases of 1.791 tonnes of gold into the SPDR gold ETF but no movement was seen in the holdings of the Gold Trust on Wednesday. The holdings of the SPDR gold ETF are at 749.774 tonnes and at 164.02 tonnes in the Gold Trust. The purchase was not, of itself, sufficient to cause the gold price to rise, but the accompanying short covering as the dollar index dropped to 98.81 and to over $1.07 against the euro, were.

Speculators were given quite a fright as they misread the Fed, the dollar and the state of the gold market. With traders and speculators in command of the U.S. gold market, while Asia continues to buy all available volume of gold offered, short covering drove the gold price as high as $1,182 at one point in the U.S., but the market then settled down to close at $1,171. This was the strong move that we were expecting.

Now the gold market must digest the Fed’s words and the likelihood of a longer wait before rate hikes happen, at a glacial pace, and in small rises, until inflation is confirming it will reach 2% in the medium term. This is positive for gold as it does indicate that the dollar’s rise will falter.

It is clear that the Fed is unhappy with the financial market’s propensity to take small changes in wording as a definitive indication that rates will rise on a certain date. Janet Yellen, made it clear that the timing of rate rises will be ‘data driven’ as they have not decided when they will raise rates. A major concern of the Fed is the volatility caused by financial market’s determination to translate every word into impending action. Nevertheless, financial markets and commentators will not change. Hence, the Fed will wait longer than needs be before acting as this will cause the least disruption to the U.S. economy and financial markets.

It is possible that the Fed will act anytime between June and next year on rates, a positive for gold and silver.